I am sure this has been discussed before here - and I have done a few Google searches, but I can't find what I am looking for.

Please understand two things: 1) I have a 2 month old son (2 months today!!!) whose sleep/eating cycle is sapping some of my mental facilities and 2) this is my husband's house and mortgage (second marriage for both of us - he had the house prior to us marrying).

I persuaded my husband to refinance awhile ago and he has been making payments. The new institution, as I recently found out, is not applying his over-payments to PRINCIPAL (as was his old institution), rather they are paying it forward. So right now, his mortgage is paid until February.

Now again, please correct me if my sleep-deprived brain isn't processing correctly, but isn't the BETTER way to pay off towards principal and not pay forward? I've been trying to explain this to him (i.e. if you pay forward, you are really paying more in interest than you would if you paid the extra towards principal), but I'm not getting through.

Soooooo: 1) am I correct or just sleep deprived? and 2) does anyone have a better way (or a website or a calculator) to help me explain this to him and convince him to change the way he is paying?

If you pay down, then the total interest you pay is reduced. So you pay not only faster, but you pay less money over the course of the loan. This is because % interest is calculated on the remaining principal each month.

If you pay ahead interest, you aren't reducing your total payments at all, you are just paying the total slightly faster.

1) I have a 2 month old son (2 months today!!!) whose sleep/eating cycle is sapping some of my mental facilities A massive congrats to you... what a wonderful blessing (despite the complete lack of sleep...)

The new institution, as I recently found out, is not applying his over-payments to PRINCIPAL (as was his old institution), rather they are paying it forward. So right now, his mortgage is paid until February. That's odd... but irrelevant.

Now again, please correct me if my sleep-deprived brain isn't processing correctly, but isn't the BETTER way to pay off towards principal and not pay forward? Nope, it makes absolutely zero difference mathematically.

I've been trying to explain this to him (i.e. if you pay forward, you are really paying more in interest than you would if you paid the extra towards principal), but I'm not getting through.Maybe accidentally, or maybe he just understands a bit clearer in his gut.

If you used an amortization schedule you could see that X amount of principal, and Y amount of interest, is paid out over Z number of months. If you pay more money (it doesn't matter how the servicer explains the bookkeeping) you are shortening the remaining time on the amortization schedule. If they say you just prepaid the next 3 months, that's the same as eliminating the last 3 months (as long as you don't stop making monthly minimum payments consistently.)

and 2) does anyone have a better way (or a website or a calculator) to help me explain this to him and convince him to change the way he is paying?THANK YOU!!!He'd be *MUCH* better off** by taking all available extra dollars and building a side fund (we call it a Mortgage Freedom Account) rather than sending the dollars to the mortgage company. He could eventually stroke a single check from that account to pay off the entire remaining balance at that time, and he would get there faster because his compounding interest earned would be more, faster, than the tax-deductible interest paid inside the mortgage.

I'm going to start off by checking the facts rather than jumping to conclusions.

You say he's paid ahead to February. Does that really mean he can skip all of his payments until then? You (or really, he) would need to talk to his mortgage servicer to determine that.

Next, do a bit of math on the statements in hand. Take a look at the principal balance from the prior statement, then use the interest rate to determine how much interest is due for the month. Then look at the statement to see if that's the interest actually shown on the statement.

If you determine the interest charged on the loan is calculated without regard to the prepayments, then you are correct in spite of the sleep deprivation. If you determine the interest charged reflects the prepayments, then the prepayments are being applied to principal and you are simply sleep deprived. ;-)

This is very wierd. And contrary to all the discussions I have ever had with my mortgage companies. They have always said, "If you pay extra, that goes toward the loan or to the escrow account. It does *NOT* count as a future payment. If you make 2 payments in May, you cannot skip the June payment." "If you are going to be out of town in June, then have somebody mail in your June payment for you, after the 1st of June."

Which specifically says (emphasis added):* If I do not pay the full amount of each monthly payment on the date it is due, I will be in default.

*I may make a full Prepayment or partial Prepayments ... The Note Holder will use my Prepayments to reduce the amount of Principal that I owe under this Note.

*If I make a partial Prepayment, there will be no changes in the due date or in the amount of my monthly payment unless the Note Holder agrees in writing to those changes.

Now, I'm not an expert, but I have never heard of anyone (except, perhaps, a local bank who keeps their mortgages) ever making such as "agreement in writing". Almost every mortgage is packaged together in a tranche and sold off as a unit. The book-keeping requirements to handle "paying forward" would be very large, and I can't see the typical payment processor doing it. The number of people who would want to pay forward rather than prepaying principal must be vanishing small, so they would have no incentive to do this work.

=============Anyway, paying extra is the wrong way to do it. If you really want to pay the mortgage off early, do as Dave said, and deposit your "extra" money into a separate account until it has accumulated enough to completely pay off the mortgage.

This is very wierd. And contrary to all the discussions I have ever had with my mortgage companies. They have always said, "If you pay extra, that goes toward the loan or to the escrow account. It does *NOT* count as a future payment. If you make 2 payments in May, you cannot skip the June payment." "If you are going to be out of town in June, then have somebody mail in your June payment for you, after the 1st of June."

It depends. If you make 2 full payments, under the terms of the servicing agreement with the investor and the terms of the note, the mortgage servicer may be able count them as 2 separate payments. If you add extra to your payment, but it's not enough for a full additional payment, then the extra will generally be credited toward principal, unless there are other fees due on the account.

The book-keeping requirements to handle "paying forward" would be very large, and I can't see the typical payment processor doing it.

It's done with auto loans all the time.And therein lies a potential clue.....

Jennifer, are we talking about home financing on a modular home?

If so, it may *very* well be chattel financing (in essence, car loan terms,) in which case they may indeed be treating it exactly as they explained.

NONE OF WHICH MATTERS... as I explained, itsall a wash in the end as long as you don't fall asleep at the checkbook... and you'll eliminate it faster and safer if you aggressively save & build a side fund than attacking it directly.

Dwdonhoff: "If you used an amortization schedule you could see that X amount of principal, and Y amount of interest, is paid out over Z number of months. If you pay more money (it doesn't matter how the servicer explains the bookkeeping) you are shortening the remaining time on the amortization schedule. If they say you just prepaid the next 3 months, that's the same as eliminating the last 3 months (as long as you don't stop making monthly minimum payments consistently.)"

. . .

NONE OF WHICH MATTERS... as I explained, itsall a wash in the end as long as you don't fall asleep at the checkbook... and you'll eliminate it faster and safer if you aggressively save & build a side fund than attacking it directly."

I do not follow and best as I understand the OP, I do not agree.

Perhaps it is a semantic issue and I undertand amortization schedules.

Can you elaborate?

When paying ahead the pay-off total is the new month that has been paid to, plus accrued interest. More principal will be paid by a prepayment of $X that allocated only to principal versus the same $X being allocated to principal and interest that would accrue on the next Y payments.

I agree with your statement that one will eliminate it earlier in either situation, but the real question is how much total interest will be paid in both scenarios. I understand paying ahead to not reduce total interest.

Regards, JAFO(and this is not easy to discuss without specific amortization schedule)

Perhaps it is a semantic issue and I undertand amortization schedules.Can you elaborate?When paying ahead the pay-off total is the new month that has been paid to, plus accrued interest. More principal will be paid by a prepayment of $X that allocated only to principal versus the same $X being allocated to principal and interest that would accrue on the next Y payments.

I suspect this is indeed semantics, and we'd need to see the NOTE, and understand the OP's state laws in regards to whether the lender is allowed to allocate overpayments toward future interest prior to such interest being charged, without providing (offsetting) interest payments for the accrual of pre-charged interest.

Shy of prepayment pealties and/or yield carve-outs, both of which are currently illegal in residential lending (but were not always so...) I have a hard time believing consumer law would allow a lender to receive payment yet continue charging interest as though the funds were not already in their possession.

Yes, you're correct, Jennifer. By paying down principal, you're effectively reducing the amount of the loan, and "skipping" payments

Agg97 - you are the one who read my sleep-deprived post correctly. Your post is greatly appreciated! NOW...can you help me put this into words that will help my husband (who does not have any math skills [beyond the four basic operations]) understand?

NOW...can you help me put this into words that will help my husband (who does not have any math skills [beyond the four basic operations]) understand?

option 1>a> Look at the bill, make sure that there is no payment due until Feb. (not typically how things happen, so you may want to call to double check)b> Put the monthly payments into your retirement account (or other savings) until Feb.

option 2> a> Look at the bill, make sure that there is no payment due until Feb. (not typically how things happen)b> check the interest paid last month and the principle owed. Is the interest paid equal to the interest rate times the principle owed? How much principle is owed? Is it the amount as if you hadn't made any early payments? OR has it been reduced by the early payments?c> If it's not clear to you, have your husband next to you as you call the bank and ask questions to clarify the above - if you're not on the loan, they probably will require him to say that you're authorized to get information on the account.

Yes, you're correct, Jennifer. By paying down principal, you're effectively reducing the amount of the loan, and "skipping" payments

Not at all. You don't skip any payments in the normal sense. What you are doing is pulling in the date when the loan is finally paid off. The "skipped" payments are those payments you would have made at the END of the loan.IOW, the payment being "skipped" is not the October & November 2012 payments -- it's the March 2037 thru December 2038 payments.

Are you absolutely, positively sure of that? How did you become sure of that?

I ask, because that would be very unusual for a mortgage to be treated that way. Do you have some unusual kind of mortgage?

If I look at the interest paid vs. the amount paid in interest it doesn't sound out to the interest rate.

That's the path I'm trying to go down to figure out what is going on with the mortgage. If you can manage to work out the interest paid in a month compared to the remaining balance on the loan, perhaps we can make some progress here.

I ask, because that would be very unusual for a mortgage to be treated that way. Do you have some unusual kind of mortgage?

Actually, it's not all *that* unusual if the payments being made are at least twice the required monthly payment amount.

I recently refinanced my mortgage, and when they got the payoff amount from the old servicer, they got it before my last payment had been credited. I got a refund from my old mortgage and decided to add the refund (which was more than my new monthly payment) to my first monthly payment, so the payment I sent for August in was twice the monthly payment, plus about $300.

I got credited for 2 monthly payments, moving my next payment due date forward to October, plus a principal reduction of $300. I sent an e-mail explaining that I had only intended to make 1 payment, and have the entire excess, not just the $300, credited toward principal. 2 days later, it was fixed, and my next payment due day was set back to September.

Of course, one point of anecdata is just that. But I also work for a mortgage servicer (who is not my current servicer) and know that, depending on the circumstances for the specific mortgage (mortgage investor rules, state laws and terms of the mortgage), they can credit multiple months due if the payment is more than 2 months of the required monthly payments.

By making these prepayments, over time he'll still have to make every scheduled payment. There is no benefit in reduced interest or fewer payments. So have him total up the payments he'll need to make.

Then compare that to making additional principal payments, where you recalculate the interest after the additional principal payment. He should find that he needs to pay fewer dollars over the life of the loan.

On the other hand, you could also view these prepayments as a kind of emergency fund. If you have some difficult time, you can skip several mortgage payments and redirect any remaining funds to something else. With the lousy interest rates on savings, you aren't losing very much compared to having the money in the bank.

So while you might not want to make any additional prepayments, you also might not need to have the existing prepayments converted into principal reductions.

Talk to your mortgage co and see if future extra payments you make can go towards principal if so directed. It used to be that you had to send a separate check for the extra amount and specify where it was to to.

If you can, then take advantage of being paid through February and continue to make payments that are specifically designated as going to principal.

Personally, I don't pay enough in mortgage interest to merit paying it down early. YMMV, but I make more than 5% on my money without even trying. I certainly wasn't in that position with an infant in the house though.